BURSTING THE BUBBLE

May 3, 1999
		What happened to Japan's star economy? Correspondent Paul Solman of WGBH, Boston examines past perceptions of the Japanese economy and its current reality.

Nov. 23, 1998: Asia fights a financial disaster in the area. Sept. 4, 1998: The Northeast Asia co-bureau chief for the Washington Post, discusses the economic crisis in Japan. July 24, 1998: Japan's ruling party choses Foreign Minister Keizo Obuchi to become the country's next leader. July 24, 1998: Prime Minister Hashimoto suffers a resounding defeat in national parliamentary elections. July 24, 1998: The U.S. intervenes in world currency markets to prop up Japan's embattled currency--the yen Browse the NewsHour's coverage of business, and Asia   The Japanese Embassy Asashi Newspaper from Japan Asia-Pacific Economic Cooperation International Mondetary Fund	JIM LEHRER: The prime minister of Japan came to the U.S. today to meet with President Clinton and others. And the major topic was the hard times Japanese economy, which is also the subject of this report by our business correspondent, Paul Solman of WGBH-Boston. PAUL SOLMAN: It's been almost a decade since the Japanese economic bubble burst. In 1987 when we did a series there, this piece of Tokyo was going for $22,000 a square foot. Today, you could get it for under $4,000. And when real estate began to fall, it was just the beginning.
	Japan, Inc.
	The landslide in values imperiled Japan's banks. Collateral for huge loans, the real estate was suddenly worth far less than the loans themselves. Japan's stock market nose-dived with its banks, in turn bringing down the country's fourth largest stock brokerage. And since consumers were pessimistic they did not spend. No wonder the Japanese economy has basically stalled out, growing at barely 1 percent a year in the 1990's, and falling nearly 3 percent in 1998. In short, the Japanese economic miracle itself seems to have been discredited, which has been especially sobering to a journalist like me, since it's a miracle I had hailed here on the NewsHour in our 1987 Japan series. You may even remember some of the images we showed you back then: Loyal, well-trained workers who ran rather than be late to work; focused, efficient businesses; farsighted investors; and working with them hand in glove, brilliant government bureaucrats whose long-term industrial policy, Japan, Inc., discouraged everything American from large discount stores to boxers weighing more than 140 pounds. But maybe we were making and watching the wrong movies. That's Itami Juzo, noted director and film star in "Tampopo," his 1986 send up of Japanese monomania this case, for noodles. By 1987, Itami's films like "A Taxing Woman" had become to satirize the Japanese economic system which beguiled so many of us. You didn't have to read between the lines. (Japanese) Itami cast the Yakuza, Japanese organized crime as a key player in Japan Inc. Itami had spelled it out. The banks loaned money to crooks. Crooks bankrolled politicians, politicians let the banks run wild, making uneconomic loans that helped inflate the bubble. (Japanese) Yoshi Tsurumi, a source of ours in the 80's, says he began to understand the extent of the problem in 1992, after Itami's film, Mimbo pushed the corruption theme even further. That's Itami's wife, Nobuko Miyamoto, in the leading role. After the film's release, the director himself was attacked by hoods. YOSHI TSURUMI: Itami Juzo was really slashed on his face by Yakuza, who thought the movie was too realistic for them to be comfortable. That was a time I noticed-- oh, my goodness, we are under estimating because of our naiveté perhaps, unprepared for the seamy side of Japan. PAUL SOLMAN: Unprepared for what's now called crony capitalism: You scratch my wallet, I'll scratch yours. But, of course, we saw only the most superficial aspects of Japan, Inc. So we interpreted what we saw as costly but basically advantageous, an economy based on mutual, even generous gift-giving. PAUL SOLMAN: That's just a regular melon. KEN OHMAE: Pretty good melon. PAUL SOLMAN: It better be. KEN OHMAE: It's so precious that it comes in a wooden box. PAUL SOLMAN: This is a fancy gift. PAUL SOLMAN: But a gift economy with its private webs of obligation, deal-making and secrecy can be even more costly than it seems, says Yoshi Tsurumi. YOSHI TSURUMI: It's the dark side of gift economy. Especially the gift economy-- you don't look into a gift horse's mouth, right? That means you turn the blind eyes to the seamy side. And you don't recognize unpleasant things.
	Without specialized skills.
	PAUL SOLMAN: So we didn't see the seamy side and played up what we did see, Japan's ace bureaucrats, for instance. While Japan fans hailed the bureaucrats, however, Itami's films derided them. And so did some others. Seth Sulkin covered Japan for the Wall Street Journal in the 80's. SETH SULKIN: I spent a lot of time interviewing Japanese bureaucrats. And what struck me about bureaucrats was that they didn't know very much about what they were regulating, what they were supposedly overseeing. PAUL SOLMAN: Eugene Dattle, a U.S. investment banker in boom-time Japan, says the bureaucrats he met were smart but inexperienced. EUGENE DATTLE: There is a personal rotation system where every member is rotated to a different job every two to three years and it's a function of their culture which basically denigrates the individual. So you don't want someone with specialized skills. And it's impossible to either have a proper supervisor, proper regulator or proper participant in the financial services industry, either government or private sector without specialized skills. PAUL SOLMAN: Moreover, says Dattle, in modern service economies, you need skilled public regulation, not cozy private relationships. It's as if we had projected Japan's obvious factory finesse and manufacturing savvy onto the rest of the economy. EUGENE DATTLE: If Toyota makes a bad car, you know it's a bad car. Whereas, in the financial services industry, we are dealing with abstractions. Think about it; a country that's predicated on secrecy so that all mistakes are generally covered up. PAUL SOLMAN: Which gets us back to the dark side of Japan, Inc., and perhaps the main insight that comes from rethinking it. That is, capitalism starts with capital, wealth invested productively to generate more wealth down the line. Japan was doing plenty of that, but if financial institutions were also funneling lots of money to politicians, gangsters and corporate cronies, that money wasn't being invested productively. Once investors start to notice, their faith fades, and an entire economy can falter. Again, Eugene Dattle. EUGENE DATTLE: The Japanese financial institutions, which we thought were dominant, were actually extremely flawed and were squandering the nation's wealth. PAUL SOLMAN: Squandering how? EUGENE DATTLE: In the sense that they were misallocating funds in terms of particular industries and also actually losing money in terms of investments overseas and in terms of investments in Japan. And what financial institutions are supposed to do basically are two things: Either discipline companies or provide money for growth. In a sense, these Japanese financial institutions were not able to do either.
	We should have been wondering.
	PAUL SOLMAN: In other words, when we were impressed, we should have been wondering. The Japanese paid a king's ran some for Rockefeller Center, didn't they -- for Sony Pictures. This scene from the Bob Newhart Show should have suggested things were out of whack. ACTOR: I'd like to buy your town and turn it into a golf course. ACTOR: No, Mr. Tagadashi, this is one town you cannot buy. ACTOR: I'll give you one million dollars for each home. ACTOR: Bring on the freaking bulldozers. PAUL SOLMAN: One last question: Do Japan Inc.'s formally ardent admirers feel the same misgivings about its economy? Not really. EZRA VOGEL: No, I don't feel I was wrong. PAUL SOLMAN: Ezra Vogel wrote Japan as #1 20 years ago. EZRA VOGEL: What I said in 1979 was that the Japanese do things extraordinarily well and I listed a number of things like they have very good compulsory education. They are very good about getting information around the world. They have a lot of loyalty to their companies. They have first-class high-quality bureaucrats. And they have a very low crime rate. And when I said Japan was number one that didn't mean they were the biggest economic power. It meant in all those areas, they handled things as well as any other country. And I think that's absolutely true. And it's still true. PAUL SOLMAN: Indeed, Japan is a rich country these days, for all its problems. Maybe as its population ages it's experiencing the aftermath of prosperity. Maybe it can't juice its economy, even with an interest rate near zero because its exports abroad have become too pricey and Japan's own people are afraid to consume. PAUL KRUGMAN: Fundamentally, people are not spending enough. The Japanese government has been very slow to appreciate that that's the nature of their problem. And they're still not really coming to grips with it. PAUL SOLMAN: Prominent economists like M.I.T.'s Paul Krugman have been saying for a while now that Japan should goose its economy with tax cuts and government spending; the Japanese seem at last to be listening. They have been spending, bailing out troubled companies and banks. Their stock market has risen, almost 25 percent in the past few months. They have been letting unemployment rise. But critics like Tsurumi say there's been no fundamental change. To quote him "the same people are in charge, including the Yakuza." But since Paul Krugman was a Japan skeptic long before the rest of us, I'd thought we'd go to him for a final dose of perspective. As it happens, he's still a contrarian. PAUL KRUGMAN: Right now, we're riding high in the U.S. and we're feeling we're right; that should be a good indicator that three years from now, you'll be back and we'll be talking about America, what went wrong and we'll be talking about some people who look hopeless, the French or somebody talking about them. What is it that they do right? But, you know, it's -- we idolized the Japanese. We took a run of success, exaggerated it, and turned everything that was a virtue into the only virtue and ignored the weaknesses of their system. PAUL SOLMAN: It a thought to keep many mind as the prime minister of Japan's still troubled economy visited high-riding America.